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The Debt Crisis



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I don’t know much about the mortgage crisis, but got an interesting insight last week. I was sitting next to a couple on a flight last week, and silently listening to them go over ALL their options on their apparently sky-high mortgage on their now overpriced house. Quite imaginative these two.

They were hardly the Joads about to be evicted from the ancestral homestead by bankers in black hats. Both seemed to be well-dressed and well off (flying from Denver to Boston) and employed. But their anger was not necessarily that they had bought in at the peak of the market and now were stuck paying off a relatively high-interest loan that was apparently more than their house was worth, but rather that with all the sudden great buys out there, they didn’t have the wherewithal to take advantage–while a default of some sort would at least free them up to go back in and buy something both far nicer and far cheaper.

If that thinking became widespread and a chain reaction–that the problem is not so much a sudden economic downturn that has meant mortgages can’t be met, but rather a combination of anger (e.g., betting wrong and now owning a debt greater than the accompanying asset is worth) and not-wanting to-play-by-the-rules (e.g., why not let bygones be bygones and instead find a way [[i.e., it's the bank's problem not ours] to start over at a cheaper interest rate and a better house for less money?) — then you can see why the banks are panicking. Perhaps they suspect that this current generation of buyer is of a different sort than from the past, and thinks obligations and contracts mean little, and everything instead is always negotiable.

We may be a long way from our grandparents’ generation. I remember hearing from them that the only thing worse than the evil of a farm mortgage was the shame of not paying it.



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